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Investing in troubled territories: industry specific political risk analysis and the oil and gas industry

Boshoff, Marc James (2010-03)

Thesis (MA (Political Science))--University of Stellenbosch, 2010.

Thesis

ENGLISH ABSTRACT: The central research question of this study concerns the level of political risk that the Ogaden
region of eastern Ethiopia poses for companies operating in, or intending to operating in the oil
and gas industry of that region. The aim is to answer that question as well as two further subquestions.
The first sub-question concerns issues pertaining to the factors and indicators that
would be included in a political risk model specifically envisaged for the oil and gas industry, and
the second concerns the practical application of political risk as a decision-making and
management tool for investors. It is practically impossible to gather all the relevant information
when undertaking a political risk analysis, to know all the unknowns. It would take an immense
amount of time to attempt such an analysis and the costs would be exorbitant. In creating a
political risk model specific to the oil and gas industry, a methodological approach is adopted to
streamline this process. It is the aim of this research study to engage in this streamlining process;
selecting the most salient variables that can then be incorporated into an industry specific model,
which will yield realistic and practical results. In terms of the political risk indication, the political
risk analysis of the Ogden returned a score putting the region in the high risk indication bracket. In
terms of investment indication, the score indicates a moderate to high risk for investments the oil
and gas industry. This does not mean that investors should stay away from the region. A high
degree of risk, if sufficiently managed, can result in increased opportunities for higher returns for
the investor. Beyond the traditional approaches to risk management there are other avenues that
the investor may choose to follow, such as a commitment to engage with local stakeholders.
These initiatives should extend beyond mere financial incentives to a more genuine form of
community interaction, with extensive local consultation. Strategies, policies, and procedures
should be developed that ensure that companies engage productively with NGOs and the media
at local levels in order create a suitable environment for all involved. Political risk is more than
simply providing a report with a risk rating tagged to the end of it. It should be a fully integrated
part of the investor’s strategy, essential to the continued success and profitability of the
investment.